After experiencing particularly challenging business conditions during the pandemic, lodging and resort REITs are showing promising signs of recovery as vaccination rates rise and consumer optimism improves. However, the path back for the sector is expected to be a staggered one, reflecting the different routes that leisure, business, and group travel are expected to take.
One of the clearest signs that the lodging sector has turned a corner is that it is finding renewed favor among investors. Total returns in the lodging sector gained 70.3% in the period from Nov. 8, 2020 to May 21, according to Nareit data, after declining 45.5% in the period from Feb.21 to Nov.7, 2020. News that tests of vaccines against COVID-19 had been highly successful emerged in early November 2020, while May 21 marked 15 months since the market peak prior to the pandemic.
On top of that, the 13 lodging REITs tracked by Nareit posted year-to-date total returns of 22.6% as of June 10, compared with a decline of 23.6% for 2020 as a whole.
Occupancy statistics also underscore the improving outlook. Buoyed by travel over the Memorial Day weekend, U.S. hotel occupancy for the week ended May 29 reached 61.8%, its highest level since February 2020, according to STR, a provider of hospitality data.
PwC Hospitality Directions US currently expects annual occupancy for U.S. hotels this year to increase to 57.2% from 44.1% in 2020, and average daily rates (ADR) to increase 8.0% in 2021 following a drop of 21.3% in 2020. Revenue per available room (RevPAR) is expected to increase 40.1% this year from 2020 and finish 2021 at approximately 74% of pre-pandemic levels.
Those numbers reflect a strong upturn in leisure travel.
Leisure Leads
During a presentation at REITweek: 2021 Investor Conference, Pebblebrook Hotel Trust (NYSE: PEB) chairman, president, and CEO Jon Bortz reported that leisure demand continues to grow. “As people get vaccinated, they book vacations. There’s huge pent up demand there.”
Leslie Hale, president and CEO of RLJ Lodging Trust (NYSE: RLJ), also told the conference that leisure travel would be the dominant driver of demand over the summer months.
Recent financial results for Apple Hospitality REIT, Inc. (NYSE: APLE) illustrate the gradual progress that the industry has been making in the wake of the challenges caused by the pandemic.
In January, Apple Hospitality’s ADR stood at $95.15. Two months later, it had increased to $103.27. During the same period, the occupancy rate rose from 45.1% to 66.3%. And RevPAR went from $42.94 to $68.46.
Justin Knight, CEO of Apple Hospitality, says leisure travel represents about 50% of current demand, compared with about 25% before the pandemic. The REIT’s suburban hotels, at 57% occupancy, outperformed its urban hotels that were at 49% occupancy in the first quarter. Apple Hospitality has experienced particularly vigorous demand in warm-weather states like California, Florida, and Texas.To entice leisure travelers, many properties are offering bonuses to members of their loyalty programs, particularly in markets with weaker demand, according to Ryan Meliker, co-founder and president of Lodging Analytics Research & Consulting.
Meliker says travelers filling up hotels once again will find many of the same pandemic protocols in place, such as stepped-up cleaning procedures and self-check-in kiosks, but more and more properties will relax mask mandates. It’ll take longer, he says, for full-service housekeeping and full-scale food and beverage service to return.
Bringing Back Business
Throughout the rest of 2021, and into 2022 and 2023, industry observers will be keeping a watchful eye on how soon business travel mirrors the promising return of leisure travel. Lodging REITs that largely cater to business, group, and convention travel in major urban markets are expected to face a longer road back.
“While leisure travel will start returning this summer as more people are vaccinated, business travel, the largest source of hotel revenue, is down 85% and is not expected to begin its slow return until the second half of this year. Full recovery is not expected until 2024,” the American Hotel & Lodging Association recently said.
Despite that significant hurdle, a report from Green Street highlights a huge achievement for lodging REITs: They generated positive hotel EBITDA (earnings before interest, taxes, depreciation, and amortization) in March for the first time since the pandemic began. STR, meanwhile, says 92% of the U.S. hotels it monitors were profitable in April.
“Things are clearly on the upswing, and Green Street believes all signs are pointing to a pretty robust recovery ahead—with the caveat about what’s going to happen with business travel and when employers are going to be comfortable with getting people back out on the road,” says Chris Darling, a lodging analyst at Green Street.
Despite concerns over when an uptick in business travel will happen, Darling believes the lodging industry will enjoy “a very quick snapback” compared with the two previous cycles.
For his part, Pebblebrook’s Bortz, speaking at REITweek, said that “for a lot of reasons, we don’t think there’s any structural impact to business travel from the pandemic and any of the technology that’s continued to evolve over that period.”
Hale at RLJ Lodging told the conference that she expects to see a “step change” in business travel as offices and schools reopen after Labor Day, with a gradual recovery occurring after that. As for group travel, “events come back first, and attendance will lag that, but ultimately it will come back,” she said.
